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"A creditor is trying to wind up our company! What does compulsory liquidation mean?"

A guide to compulsory liquidation

When a company ends up in compulsory liquidation, it is usually a sign that a creditor has given up trying to recover money from the company, or it indicates that a Crown or Government agency has wound up the company, using a winding up petition under the public interest.

So, how does a company go into compulsory liquidation and what happens in the winding up process?

Clearly, this is a very serious action for creditors to take (not least because of the cost) and if the company is subject to this process it can severely curtail the ability to conduct business.

Read the guide and questions here but if you have a very irate creditor talking about winding up your company -SEEK PROFESSIONAL ADVICE NOW and call us on 0800 9700539.

It is possible to stop compulsory liquidation, but you have to act quickly if your company has been "served a winding up petition".

"So what happens in a compulsory liquidation?"

Creditor's petitions:

A creditor has pursued the debts due to it for a significant period and has exhausted all other avenues to recover their money. Deals to repay have often been agreed but the debtor company has not stuck to the deals, has demonstrated intractability or simply does not communicate with the creditor. They instruct a solicitor or debt collector to collect the debt, but all avenues fail. The agent then discusses the cost of proceeding with an action to wind the company up.

The costs of this action are not insubstantial and a creditor has to decide whether the debtor is likely to pay up. A debt of over £750 must be undisputed and the creditor must have notified the debtor of its intent to collect the debt. This often involves issuing a statutory demand first. If the debtor fails to pay the statutory demand in 21 days and does not dispute the debt, then the creditor may issue a winding up petition.

The costs vary between solicitors but a typical cost of the action will be £250-£500 for a stat demand, and £1,000-£2,000 for a winding up petition (includes Court costs). Despite this for larger debts it is a very effective way of collecting larger debts when the creditor believes that there is sufficient resource to pay it. Many larger companies use established debt collection law firms to collect their debts this way.

The application for a petition will be granted in cases where it can be proven to the Courts satisfaction that the debt is undisputed, attempts to recover have been undertaken and the debtor is not compliant. A petition will be issued and court hearing date granted. The date is usually well in the future because of court pressures. Once the petition is correctly served upon the company it has a period to pay the debt or to defend the action. This is expensive as the action is always in a High Court and requires a barrister to attend. The costs of such defence are high. If the case is found the company is wound up by the Court.

WARNING! Even if the debt is paid (always with full costs) the fact that a petition is issued means that a winding up hearing (in the High Court) MUST be held. Between the date of the payment and hearing it is possible (and often happens) that another creditor learns of the petition and "substitutes" their debt for the paid debt. Thus"piggy-backing"the action in order to get ahead of other creditors and get paid.

Advertisement of the Petition

A minimum of 15 days before the hearing, the petition can be"advertised" in the London Gazette. Of course all high street banks and lenders monitor this very carefully because if a customer is involved in such an action they usually MUST freeze the bank account immediately - thus stopping any trading. The purpose of this is to stop assets being sold, or other transactions, that may worsen the creditors position being carried out. This is to stop disposition of assets under s127 Insolvency Act 1986.

This mechanism is used most by HM Revenue & Customs. Over 60% of all petitions are issued by the crown agencies. Why?

Well, the reason for this is that HMRC are "involuntary" creditors. Because you are trading and employing people, the debt to the crown ticks up. If you have tried to do deals to repay outstanding PAYE and or VAT and still fail to make payments the crown debt will be rising. So they decide to wind your company up. The company will then pay, enter a CVA or Administration or simply cease trading.

If the Crown winds your company up remember this, the liquidator is court appointed and will investigate the actions of the officers of the company very carefully. If it can be proven that you traded wrongfully, took credit without reasonable prospect of repaying the debts, and failed to submit accounts or a number of other offences, then it is possible you will face action.

It is possible to prevent the advertisement of the petition in the London Gazette, speak to us for options. 0800 9700539

Now the technical warning:

Under the Company Directors Disqualification Act 1986, you could be banned as a director for up to 15 years. You could also face criminal proceedings under the Social Security and Administration Act 1992 and the Criminal Justice Act 1988. In English, this means if PAYE has been abused to the betterment of the company and or its directors any such gains can be pursued from the personal estate of the director concerned.

Under the Income Tax (Employment) Regulations 1993 the HMRC is entitled to recover unpaid PAYE from directors where it can be proven that the directors were aware of the wilful failure to operate the PAYE scheme (on the director's remuneration) correctly.

Government petitions:

If the Crown (either tax agencies or the DBIS) believes that a company is contravening legislation, such as the Trading Standards legislation or is acting against the public or government interest, it is possible for the company to be liquidated compulsorily. This is very serious action to take, and is not used very often. In such cases criminal and or disqualification proceedings are quite common.